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CapitaLand (EQUAL-WEIGHT; Target Price: NIL)

1H12 clean PATMI of S$169mn was S$11mn ahead of our expectations. The key positive surprise to us was the sharp rebound in China home sales, which should support the stock near term, despite sluggish Singapore sales. The stock is trading at 0.87x its 2Q12 NAV of S$3.43.) China residential sales triple to 812 units from a restated 255 in 1Q12… We had forecast 334 units. Reported figures now include ~10-20 per cent of options issued that have yet to convert to S&P agreements – management says this typically takes 1-3 months. Nonetheless, the sharp rebound in sales was broad based across segments and cities: comprising 242 units of The Loft, Chengdu (Mass); 307 units in Dolce Vita, Guangzhou (Mid); 24 units in Paragon, Shanghai (High); and 124 units of The Beaufort, Beijing (High).

Management expects 2H12 to be better than 1H12 as economic growth picks up. Management says project selling prices in China were up by a blended 5 per cent in the

quarter. While this is also true for the market, it is important to note that CapitaLand did not cut prices in late 4Q11/1Q12, so its price increases are coming off a higher base. Singapore still sluggish. CapitaLand sold 202 units in 2Q12, in line with our forecasts. While up versus the 57 units in 1Q12, this include 125 units at newly launched Sky Habitat. D’Leedon sold a better-than-expected 41 units compared with eight in 1Q12, but there are still ~1,300 units unsold. For Interlace, it sold 27 units compared with eight in 1Q12. The company is

looking to replenish landbank – yesterday it narrowly lost out (by 2 per cent) in its bid for a site in Tanah Merah. Management says its focus is on the right site where it feels it can add value (rather than on a particular market segment). We expect competition in GLS tenders to continue, and given CapitaLand’s dwindling pipeline – down to just 2,200 units – we could see it becoming more aggressive in future bids. – Morgan Stanley Research

 

Cosco Corporation (REDUCE; Target Price: S$0.69)

Cosco Corp posted a 13 per cent y-y decline in 2QFY12 profits to S$27.6mn, which is a level similar to 1QFY12 profits. Revenue was down 2 per cent y-y to S$975mn, while gross profit was up 56 per cent y-y. This is due to reversal of prior loss provisions and higher margins for ship repair & conversion and offshore jobs. If we adjust the numbers for the loss provisions, the y-y increase in gross profit would be more muted at 22 per cent. On a 1HFY12 basis, net profit was down 20 per cent to S$55.44m, on the back of a 2.6 per cent decline in turnover. Gross profit growth was flat on a y-y basis, if adjusted for provisions. For both periods, gross profits were eroded by higher operational and finance cost, while lower other operating income and a poor shipping performance also contributed to a decline in net profits. The results are reflective of a difficult operating environment and the outlook remains bleak, in our view. We saw respite from loss provisions as the company managed to get a better grip on execution of offshore orders, aided by a weaker RMB. Management do not foresee a recovery in the shipbuilding segment anytime soon. Despite the poorer margins, they highlighted their need to secure more orders to keep the yards busy. They also highlight that the shipping business remains challenging. Cosco trades at FY12/13F P/Es of 14.8/19.6x, respectively, and FY12/13F P/Bs of 1.9/1.9x, which are near the mid-range of its 3-year historical ranges (P/E range of 9.0 – 32.0x, P/B range of 1.45 – 4.36x). Valuations remain un-compelling, in our view, considering the weak shipbuilding outlook.– Nomura Equity Research

 

Hi-P International (BUY; Target Price: S$0.74)

Q2 dragged by low margin mix. Excluding one-off charges, core profit was S$3m, a steep 73 per cent y-o-y decline despite 10 per cent growth in sales to S$252m. Sales were driven by lower value-add assembly for smartphones which caused severe margin compression (2Q12 core net margin: 1.9 per cent vs 2Q11: 3.2 per cent) because of higher material content on top of increased labour costs and overheads. Despite posting a net loss of S$0.6m, Hi-P is guiding for higher sales and net profits in FY12 over FY11. This implies 2H12 net profit > S$45m or an average of S$22m each for the next two quarters. We believe such optimistic guidance is driven by new tablets and smartphones for customers such as Apple, RIM and Amazon in addition to sports devices for Nike. While details are scarce from suppliers, we gather from industry checks that component suppliers are expected to ramp up production in July/Aug for the release of the new iPhone in Oct and Amazon’s new e-book in 2H12. In anticipation of this strong run-rate, FY12 capex of S$180m is significantly higher than S$65m in FY11. We have adjusted FY12/13F by -4 per cent /14 per cent assuming 50bps margin improvement and 24 per cent higher sales in FY13F. TP raised to S$0.91, Upgrade to Buy. At current valuations, Hi-P is cheaper than the average for its peers (16.6x FY12, 12x FY13). Excluding net CPS of S$0.14, the stock is even more compelling at 9.6x FY12 PE. Hi-P’s meaningful engagement with Apple started with iPad and historically, share prices have rallied ahead of new iPad launches. Given that the company is growing bigger in its engagement in next generation smartphones, we urge investors to position in the stock ahead of the new launch. Upgrade to Buy. – DBS Vickers Research

 

Olam International (TAKE PROFIT; Target Price: S$1.50)

Olam International’s (Olam) share price performance has been disappointing after its 3Q FY12 results missed analysts’ estimates. We recommend a “Take Profit” rating on Olam and value it at S$1.50, based on 1.1x Price-to-Adjusted Book Value, given aggressive accounting poor earnings quality highly-geared balance sheet and expected earnings drag from Industrial Raw Materials (IRM) and Commodity Financial Services (CFS) divisions in FY12. In term of market capitalization, Olam is relatively small if comparing to ADM, Bunge and Glencore. Based on P/E valuation metric, Olam’s current valuation is on par with other bigger players. On P/B basis, Olam is relatively overvalued. We recognize the fact that Olam has bigger potential to grow than those big players in the industry. However, Olam’s debt-to-equity ratio is almost 293 per cent, based on data compiled by Bloomberg. Total borrowing-to-Total Equity as at 3Q FY12 stood at 2.16x. Although the company said that its short-term borrowings are backed by fully hedged inventories, we are still concern about the quality of its intangible and biological assets (S$1.08b), fair value of derivative instruments and S$272m of perpetual securities are classified under equity account, which together contribute to higher book value and better financial metrics.– SIAS Research

 

Cerebos Pacific (OUTPERFORM; Target Price: S$6.59)

Suntory has offered S$6.60 per share in cash for the 17 per cent stake in Cerebos that it does not own. After the offer, it will take Cerebos private. At the same time, Cerebos released 1H12 results that were in line with expectations. Net profit rose 6 per cent yoy to S$48m or 42 per cent of our full-year estimate. Historically, 2H earnings are stronger. We think that the offer price is an attractive one, being very close to our SOP-derived target price. The offer price implies 18x CY12 P/E, which is in line with regional peers’ average and at a premium over Singapore-listed F&B players’ 16x P/E. The offer price also exceeds its own peak forward P/E of 16,4x in the past four years. The stock was previously trading at 15x CY12 P/E, based on its last traded price. We view this event as an inevitable one. While Cerebos has been a good,steady company with solid dividends, its share price has been handicapped by low liquidity. We advise investors to take up the offer. We expect Suntory to get a take up of at least the additional 7.4 per cent stake needed to get the stock delisted. We are dropping coverage of the stock with the anticipated returns achieved. – CIMB